Bidding into the Red: A Model of Post-Auction Bankruptcy

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second‐price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first‐price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first‐price auction over the second‐price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second‐price auction.     

Specification and negotiation in incomplete contracts

We investigate contractors' bargaining power and holdup on buyers in procurement auctions of incomplete contracts held by California Department of Transportation. Using a model where contractors bid competitively in response to a buyer's choice of initial contract design, we infer the contractors' costs and bargaining power from the bids and transfers negotiated after the auction. We find that the contract winners have substantial bargaining power in post‐auction negotiation. The average holdup on the buyer is about 20% of project costs. Counterfactual cost‐plus contracts would reduce the buyer's surplus in 72% of the projects, with an average reduction over $382,000.     

Strategic bidding in multi‐unit auctions with capacity constrained bidders: the New York capacity market

This article employs a simple model to describe bidding behavior in multi‐unit uniform price procurement auctions when firms are capacity constrained. Using data from the New York City procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate on an equilibrium that extracts high rents for all bidders. I show theoretically and empirically that the largest bidder submits the auction clearing bid. All other bidders submit inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase.     

“Upping the ante”: how to design efficient auctions with entry?

Of primary importance in auction design is the set of strategies available to the seller at the auction stage. We first formalize hold‐up regarding entry costs that preys on second‐price auctions when the seller may engage in a costly shill‐bidding activity. We derive the optimal reserve and show how shill bidding can make posted prices outperforming auctions. Second, we advocate for a new regulation where shills would be banned but with the possibility of canceling sales ex post, which offers some valuable flexibility: the English auction with jump bids implements, then, the first best in general environments.     

Procurement when price and quality matter

A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost and marginal cost of providing quality). We characterize the buyer's optimal buying mechanism. We then use the optimal mechanism as a theoretical and numerical benchmark to study simpler buying procedures such as scoring auctions and bargaining. Scoring auctions can extract a significant proportion of the buyer's strategic surplus (the difference between the expected utility from the optimal mechanism and the efficient auction). Bargaining does less well and often does worse than the efficient auction.     

Information feedback in first price auctions

I apply the notion of a self‐confirming equilibrium (SCE) to study how feedback in first price auctions influences bidders' perceptions about their strategic environment, and consequently their bidding behavior. In a private values setting, revealing the two highest bids at the end of each auction is sufficient for bidders to have correct beliefs (justifying the assumption of Nash equilibrium). In contrast, in every symmetric SCE of a symmetric, affiliated, private values model, bidding strategies and revenue are (weakly) higher if only the highest bid is revealed. I also consider interdependent valuations and discuss implications for the empirical auction literature.     

Auctions versus negotiations: the effects of inefficient renegotiation

For the procurement of complex goods, the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, scoring auctions implement the efficient allocation. If this is not feasible, the buyer must choose between a price‐only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is very costly, and if the buyer's bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.     

Auctions with selective entry and risk averse bidders: theory and evidence

We study auctions with selective entry and risk averse bidders. Our model accounts for risk averse bidders' endogenous participation decision and thus encompasses the existing entry models. We establish entry and bidding equilibrium in first‐price auction and ascending auction mechanisms and show that bidders' entry behavior differs between these two mechanisms with different forms of risk aversion. Our approach provides testable implications of risk aversion in terms of entry behavior. We analyze a timber auction data set and propose a simple test for the form of bidders' risk aversion based on our model implications.     

Field experiments on the effects of reserve prices in auctions: more Magic on the Internet

I present experimental evidence on the effects of minimum bids in first‐price, sealed‐bid auctions. The auction experiments manipulated the minimum bids in a preexisting market on the Internet for collectible trading cards from the game Magic: the Gathering. I examine a number of outcomes, including the number of participating bidders, the probability of sale, the levels of individual bids, and the auctioneer's revenues. The benchmark theoretical model is one with symmetric, risk‐neutral bidders with independent private values. The results verify a number of the predictions concerning equilibrium bidding. Many bidders behave strategically, anticipating the effects of the reserve price on others' bids.     

Bounds on revenue distributions in counterfactual auctions with reserve prices

Measuring auction revenues under counterfactual reserve prices or formats requires knowledge of distributions of bidders' values and private signals. This poses a challenge when bids are observed from first‐price, common‐value auctions. I bound counterfactual revenue distributions without imposing parametric restrictions on the model structure. Using data from U.S. municipal bond auctions, I find first‐price and second‐price auctions under optimal reserve prices lead to little improvement in revenues over existing first‐price formats. The number of bidders has a more significant impact on revenues in optimal auctions. I also find invoking an incorrect assumption of private values in counterfactual analyses results in small errors in predicting revenues from optimal second‐price auctions.     

Subcontracting and competitive bidding on incomplete procurement contracts

This article examines the impact of incomplete contracts on subcontracting and the design of procurement auctions. I estimate the effect of ex post contract revisions on unit costs for both subcontracted and in‐house performed work items on bridge projects procured by the California Department of Transportation. I model a scoring auction showing how ex post revisions skew bidding decisions and estimate unit costs from bid data using the method of sieve estimation. The results highlight the cost implications of incomplete contracting frictions, subcontracting decisions, and bidding distortions. In conclusion, I propose alternative auction mechanisms that could improve outcomes.     

Strategic design under uncertain evaluations: structural analysis of design‐build auctions

I investigate firms' competition over price and product design under uncertain design evaluations in the context of Design‐Build (DB) auctions. Reviewers' design evaluations contain uncertainty from a bidder's perspective, leading luck to dampen differences in the firms' chances of winning. I model bidders' behavior and show semiparametric identification of the model primitives. Uncertain design evaluations increase the expected price of design quality and exacerbate an auctioneer's uncertainty in auction outcomes. These effects are mostly due to changes in bidding strategies. Bid ranking swaps due to uncertain evaluations account for a small share of these effects.     

Bidder behavior in central bank repo auctions: Evidence from the Bundesbank

For many central banks, repo auctions are the most important monetary policy instrument. This paper employs a unique data set of individual bids submitted in the repo auctions of the Bundesbank to analyze the determinants of banks’ bidding behavior and the empirical performance of repo auctions. We conduct a panel analysis to estimate how banks bidding is affected by various auction as well as bidder-specific factors including interest rate expectations, interest rate uncertainty, maturing allotment, reserve fulfillment and a bank’s size.     

Designing electricity auctions

Motivated by the new auction format in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. Uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids, and the elasticity of demand are analyzed. We also consider the relationship between market structure and market performance in the two auction formats.     

An empirical study of auction revenue rankings: the case of municipal bonds

Using a novel dataset of 386 first‐price municipal bond auctions held in California, I perform counterfactual revenue comparisons, based on the theoretical result of Milgrom and Weber (1982). I show that the revenue in the second‐price auction is nonparametrically identified, and the counterfactual revenue in the English auction can be bounded in an informative way. These results form a basis for nonparametric estimation of counterfactual revenue differences. I find that the revenue gain from using the English auction would be in the range of 11%—19% of the gross underwriting spread, and that most of it would already be captured by using the second‐price auction. The recent explosive growth of Internet English auctions, administered by Grant Street Group, provides external support to the claim that auction design matters in this market.     

Bidding strategies and takeover premiums: A review

I review recent empirical research documenting offer premiums and bidding strategies in corporate takeovers. The discussion ranges from optimal auction bidding to the choice of deal payment form and premium effects of poison pills. The evidence describes the takeover process at a detailed level, from initial premiums to bid jumps, entry of rival bidders, and toehold strategies. Cross-sectional tests illuminate whether bidders properly adjust for winner's curse, whether target stock price runups force offer price markups, and whether auctions of bankrupt firms result in fire-sale discounts. The evidence is suggestive of rational strategic bidding behavior in specific contexts.     

Buy‐out prices in auctions: seller competition and multi‐unit demands

Online auction sites often enable sellers to add a buy‐out price. In one‐shot auctions, this has been motivated by appeal to impatience or risk aversion. We offer additional justification in a dynamic model, by showing that an early seller has an incentive to use a buy‐out price, if a similar product is offered later by another seller, and bidders desire multiple objects. Revenue in the first auction increases, but revenue in the second auction decreases, as does the sum of revenues. The buy‐out price causes the auction sequence to become inefficient, because the first item may be awarded to a bidder who should have received none.     

Procurement under public scrutiny: auctions versus negotiations

We compare two commonly used mechanisms in public procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer's preferences and may collude with one of the sellers. We provide a general characterization of both mechanisms based on public scrutiny requirements and show—contrary to conventional wisdom—that an intransparent negotiation always yields higher social surplus than a transparent auction. Moreover, there exists a lower bound on the number of sellers such that the negotiation also generates a higher buyer surplus.     

Complements and substitutes in sequential auctions: the case of water auctions

We use data on sequential water auctions to estimate demand when units are complements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying a high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude. We recover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive but consistent with noncooperative behavior. Demand estimates are biased if one ignores these features.     

Ex Post Moral Hazard and Bayesian Learning in Insurance

We study a dynamic insurance market with asymmetric information and ex post moral hazard. In our model, the insurance buyer's risk type is unknown to the insurer; moreover, the buyer has the option of not reporting losses. The insurer sets premia according to the buyer's experience rating, computed via Bayesian estimation based on buyer's history of reported claims. Accordingly, the buyer has strategic incentive to withhold information about losses. We construct an insurance market information equilibrium model and show that a variety of reporting strategies are possible. The results are illustrated with explicit computations in a two‐period risk‐neutral case study.